The Fed's 'hidden agenda' behind money-printing

 Published: Wednesday, 25 Sep 2013 | 12:04 PM ET

By: Peter J. Tanous

Getty Images

 

The markets were surprised when the Federal Reserve did not announce a tapering of the quantitative easing bond buying program at its September meeting. Indeed, its signal to the market that it was keeping interest rates low was welcome, but there may be a hidden agenda.
Since it began in late 2008, QE has spurred a vigorous debate about its merits, both positive and negative.

On the positive side, the easy money and low interest rates resulting from quantitative easing have been a shot in the arm to the economy, fueling the stock market and helping the housing recovery. On the negative side, The Fed accomplished QE by "printing money" to buy Treasurys, and through the massive power of its purchases drove interest rates to record lows.
But in the process, the Fed accumulated an unprecedented balance sheet of more than $3.6 trillion which needs to go somewhere, someday.
But we know all this.

I believe that one of the most important reasons the Fed is determined to keep interest rates low is one that is rarely talked about, and which comprises a dark economic foreboding that should frighten us all.

Gartman: Leave tapering to next Fed group

The economy is stronger than it looks, said Dennis Gartman, The Gartman Letter, sharing his outlook on gold, the next Fed chairman and the fate of Treasury rates.

  Let me start with a question: How would you feel if you knew that almost all of the money you pay in personal income tax went to pay just one bill, the interest on the debt? Chances are, you and millions of Americans would find that completely unacceptable and indeed they should.
But that is where we may be heading.


Thanks to the Fed, the interest rate paid on our national debt is at an historic low of 2.4 percent, according to the Congressional Budget Office.
Given the U.S.'s huge accumulated deficit, this low interest rate is important to keep debt servicing costs down.

But isn't it fair to ask what the interest cost of our debt would be if interest rates returned to a more normal level? What's a normal level? How about the average interest rate the Treasury paid on U.S. debt over the last 20 years?
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That rate is 5.7percent, not extravagantly high at all by historic standards.
So here's where it gets scary: U.S. debt held by the public today is about $12 trillion. The budget deficit projections are going down, true, but the United States is still incurring an annual budget deficit by spending more than we take in in taxes and revenue.
The CBO estimates that by 2020 total debt held by the public will be $16.6 trillion as a result of the rising accumulated debt.

Do the math: If we were to pay an average interest rate on our debt of 5.7 percent, rather than the 2.4 percent we pay today, in 2020 our debt service cost will be about $930 billion.
Now compare that to the amount the Internal Revenue Service collects from us in personal income taxes.

In 2012, that amount was $1.1 trillion, meaning that if interest rates went back to a more normal level of, say, 5.7 percent, 85 percent of all personal income taxes collected would go to servicing the debt. No wonder the Fed is worried.
Some economists will also suggest that interest rates may go much higher than 5.7 percent largely as a result of the massive QE exercise of printing money at an unprecedented rate. We just don't know what the effect of all this will be but many economists warn that it can only result in inflation down the road.

As of today, interest rates are rising, and if this is a turning point, it is a major one.
Rates in the U.S. peaked in 1980 (remember the 14 percent Treasury bonds?) so if we are at the point of reversing a 33-year downward trend, who wants to predict how this will affect the economy?
One thing is clear: Based on CBO projections, if interest rates just rise to their 20-year average, we will have an untenable, unacceptable interest rate bill whose beneficiaries are China, Japan, and others who own our bonds.

And if Americans find out that the lion's share of their income tax payments are going to service the debt, prepare for a new American revolution.


Peter J. Tanous is president of Lepercq Lynx Investment Advisory in Washington D.C. He is the co-author (with Arthur Laffer and Stephen Moore) of The End of Prosperity (2008), and co-author (with CNBC.com's Jeff Cox) of Debt, Deficits, and the Demise of the American Economy (2011).

Six feet under as a retirement plan?

Six feet under as a retirement plan?

You've heard the story about America's retirement crisis.

Young people don't save enough. Older people have to work longer. Public pension benefits are always on the verge of being slashed, and Social Security's future is anyone's guess. No one trusts the stock market, but keeping assets in a savings account generates the same return as keeping them under a mattress.

The retirement picture is alarming at best. And now it has come to this: In its annual retirement study of middle-income Americans (income of $25,000 to $100,000), Wells Fargo asked participants if they expect to work until they die.

Lynn Koenig | Flickr | Getty Images

 

"This is the first time we asked if people thought they would work until they die or become too sick," said Laurie Nordquist, head of Wells Fargo Institutional Retirement and Trust. Thirty-seven percent of middle-income Americans surveyed by Wells Fargo said they have that expectation. The finding translates to just under two in five Americans who believe they will never be able to retire.
Wells included the question based on a larger trend exposed when participants have been asked how many expect to work until they are at least 80. That number was at 34 percent in this year's survey, a significant rise from 25 percent two years ago. It's been on a steady rise, too, up from 30 percent in 2012.

If 80 is the new 60, as a recent UBS "Investor Watch" report proclaimed, it's looking like six feet under is the new 65 for a significant percentage of Americans.

 

The underlying trends in Wells Fargo survey are just as distressing, if not surprising.
"What we heard is that paying day-to-day bills trumps planning for retirement," Nordquist said. "Day-to-day bills are really overwhelming them."

Fifty-nine percent said their top financial concern is everyday bills, and 42 percent told Wells that it is not possible to both pay them and save for retirement.
"As much as we read about the economy turning around, people in middle-class America are not feeling it yet," Nordquist said.



Even for those with assets to invest for retirement, lack of a plan and lack of confidence in the stock market hold them back from building a nest egg.
Only 30 percent have a retirement plan. The benefit of having a strategy is huge: Wells Fargo found that those with a plan have saved three times as much toward their retirement goal as those without one.

"That's really amazing, and it makes a really big difference, whether your income is $25,000 or $100,000," Nordquist said. "The plan doesn't need to be elaborate."
Yet the survey found that 75 percent of middle-income Americans said they are not confident that stock market is a good place to save for retirement. That finding holds true for both young and old.


In fact, respondents in their 20s are the least sure, with 80 percent saying they are not confident about investing in the market.
"They have the long runway and should be taking advantage of appreciation," Nordquist said. Yet when Wells Fargo asked what they would do if given $5,000 to invest, most said they would put it in a savings account.

One of the survey's more encouraging findings was that only 7 percent of Americans "strongly agree" that gambling in Las Vegas is as good an idea as investing in the stock market, but that's little solace (and 27 percent of Americans surveyed generally agreed with the statement).
Starting early and having a plan are the most important steps, Nordquist said.
"Those two have a lot more to do with what you end up with than the amount, even if you're saving at a 6 percent to 10 percent level," Nordquist said. "When you're young but not in the market, you won't build the nest egg."


People in their 30s were the most likely to have a retirement plan in place, but 45 percent of respondents said they have so few assets there is no reason for them to have a plan, while another 25 percent said they don't know how to create one.
"The ones without a plan we worry about," Nordquist said.
Their plan could become to work until they drop.

—By Eric Rosenbaum, CNBC.com, and Anthony Volastro, CNBC Segment Producer

Oil constrained by high supply, weaker US growth

 Published: Monday, 21 Oct 2013 | 9:52 AM ET

 

By: Sri Jegarajah | Senior Correspondent, CNBC Asia Pacific

Henrik Jonsson | E+ | Getty Images

 

Benchmark U.S. crude prices may dip further below $100 a barrel this week, reflecting favorable supply dynamics and weaker growth prospects in the U.S., according to CNBC's latest market survey of traders, analysts and strategists.
Almost three-quarters of the respondents in CNBC's latest poll of oil market sentiment (18 out of 25) believe prices will fall this week, 20 percent (5 out 25) expect gains and 8 percent (2 out of 25) are neutral.

U.S. crude fell below $100 per barrel on Monday amid pressure from strong supplies, but losses were limited by hopes the U.S. Federal Reserve will delay curbing its money printing program until next year, helping shore up the demand outlook, Reuters reported.


Strategists said U.S. crude futures' breach of the triple-digit level, for the first time since July 3, paved the way for a further slide. "$100 U.S. oil is key," said Jonathan Barratt, chief executive officer of Sydney-based commodity research firm Barratt's Bulletin, targeting next key support levels at $97 and then $85.

A sub-par September U.S. jobs report on Tuesday may provide the catalyst for further oil price weakness, said Carl Larry, president of Houston-based consultancy Oil Outlooks and Opinions. He added that last week's jobless claims numbers could bode ill for this week's closely watched non-farm payrolls.

Initial claims for state unemployment benefits fell 15,000 to a seasonally adjusted 358,000, the Labor Department said last Thursday, slipping from a six-month high the prior week. But the figure was still elevated, as California battled with a backlog related to computer problems. Economists polled by Reuters had expected first-time applications to fall further, to 335,000.

"It's not 'the economy stupid', it's the stupid economy," Larry said. The latest jobless claims data "Is not a good sign for the U.S. recovery and even worse for the outlook for demand...we may see the same repeated when we see the unemployment numbers," he continued.


A perceived drop in in the political temperature in the Middle East, combined with improved supply fundamentals in the U.S., will still keep prices in check, strategists and traders added.
"High over-supplies (despite a strong drop in OPEC exports) and improving geo-political climate are likely to take their toll," said Commerzbank's head of commodity research, Eugen Weinberg.
Analysts who examined technical indicators also forecasted tamer price action.

"It is looking toppy on the charts," said Tom James, director and co-founder of Navitas Resources. "Charts and fundamentals are looking for a softer market. Brent crude has been trading between the top of the Bollinger band, and has key support at $106. We're not expecting a drop below that, but the market will struggle to move higher."

Saxo Bank's Ole Hansen added that brent crude "looks like it could have another leg down towards $105, from where support should be re-established".

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Five key questions for taxpayers

 Published: Wednesday, 25 Sep 2013 | 9:00 AM ET

 

By: Shelly K. Schwartz, Special to CNBC.com

Daniel Acker | Bloomberg | Getty Images

 

Taxpayers looking to keep more of their money from Uncle Sam this year need to start with a detailed, financial plan.
To that point, anyone who believes they can wait until December to start planning their tax strategy should think again.

Financial advisors stress that now is the time to get serious and that creating a tax planning "to do" list is important. Here are five key questions that taxpayers need to get answers to in order to help them plan their year-end tax strategy.

1. When should I start to plan my year-end tax strategy?
Anywhere from September through November, taxpayers should be thinking about year-end tax planning, financial experts say. It's essential to be able to plan ahead so that you know where you are, tax-wise.

2. What can I do now to lower my current year tax bill?
Taxpayers looking to keep more of their money from Uncle Sam will need to start with a detailed plan. Strategies that work include deferring year-end bonuses until January 2014, delaying the exercise of incentive stock options and postponing receipt of distributions beyond the required minimum from individual retirement accounts.

 

3. Have there been income tax changes that will directly impact me in 2014?

Yes, especially for high-income earners. For 2013, married couples filing jointly with taxable income greater than $450,000 will face a new 39.6 percent top marginal income tax rate, plus a bump to 20 percent, up from 15 percent, on qualified dividend and long-term capital gains. Joint filers earning more than $250,000 will also be subject to a new 3.8 percent Medicare surtax on net investment income.

4. Should I sell underperforming stocks to offset capital gains?

It's a good idea to consult with a financial expert on this subject. Investors can minimize their capital gains tax bite by selling stocks and mutual funds that have lost in value before the end of the year. The Internal Revenue Service allows investors to offset capital gains with capital losses dollar for dollar.

5. What are some tax-break options if I make charitable donations?

Charitable contributions made to qualified organizations may help lower a tax bill. It's key to know which form to file to claim a charitable contribution, or how to itemize deductions. Investors can also donate appreciated property instead of cash to a charity, which yields double the bang for the buck. This occurs because an individual can deduct the property's fair market value on the date it gifts and avoid paying capital gains tax on the appreciation. It is a good idea to speak with a financial professional to help ensure your giving pays off on your return.

—Shelly K. Schwartz, Special to CNBC.com

The money mistakes awaiting college students

 Published: Wednesday, 2 Oct 2013 | 7:03 AM ET

By: Kelley Holland | Special to CNBC 

 

Image Source | Getty Images

 

Sending your baby to college for the first time can be a nerve wracking experience. What if there is too much partying? What if the roommates don't get along? Will the food be all right?
There is another, less visible menace: the financial pitfalls that await college students.
From living on a budget to opening a checking account and planning a trip over spring break, college students are navigating new financial territory. And most college students are ill prepared for the challenge.

"They're in that transition from under Mom and Dad's wing to independence," said Patricia Seaman of the National Endowment for Financial Education.
Seaman should know: Her older daughter is a junior in college, and she has a high school senior.
The problem isn't just one of dollars and cents. Students who feel unduly burdened by their finances often wind up dropping out of school.

A Harvard analysis of OECD data found that the U.S. has the highest dropout rate in the industrialized world. And a 2011 report by the Pew Research Center found for people ages 18 to 34 without college degrees, two thirds said they left to support their family, and 48 percent said they could not afford college.

One cause of students' money woes is that by and large, college students are financially illiterate. A recent survey by the Financial Industry Regulatory Authority found that "young individuals display much lower financial literacy than older individuals," and while financial literacy seemed to increase with age, overall, 61 percent of respondents to a simple quiz on financial concepts could not answer more than three out of the five questions correctly.


In addition, students are faced with simultaneous financial challenges. They may be contending with loan obligations and financial aid refunds, a food budget for meals not on the meal plan, textbook purchases and a checking account, with or without a debit card.

Financial service providers are often eager to work with students, but they don't always make it simple. For example, many banks offer students accounts with low or no minimum balance requirements, but they may charge a lot for overdrafts. And often, a school will have an agreement with a company to disburse financial aid payments via a debit card on the back of a student's ID card. That can create a whole new set of temptations—and of course, companies in that business can charge hefty fees for services like balance inquiries.
The upshot is that students are often graduating with hefty debt—and not just from financial aid. A recent study by Fidelity Investments found that 70 percent of the class of 2013 graduated with debt. The average amount of $35,200 included an $3,000 in credit card debt.

What can students and their parents do to avoid these financial pitfalls?

Suze on Paying for College: Don't Do This!

 

Suze Orman has a warning for parents of college students on what they absolutely shouldn't do to help pay the tuition bill.

The first step is to talk, says Keith Bernhardt, vice president of college planning at Fidelity Investments. "I think that more could be done from a planning perspective, and having eyes wide open about what the total cost of college might be."

Parents should also monitor what their kids are doing. Seaman recommends that parents have access to a child's college bank or credit card account. "They can spot the financial pitfalls that kids are falling into," she said. One option is a prepaid credit card where transaction notices flow to the parents. Another is adding the child to a parent's credit card—setting a lower credit limit for the child.
It's also important to gradually increase the amount of financial independence your child has, once he or she masters the basics. They need to learn to handle money, and it's best to have them make small mistakes while they are in a relatively safe place.

For some students, that opportunity comes when they live off campus. Seaman's daughter, Katharine Rowan, is a junior at the University of Wisconsin-Platteville, and living off campus.
"When we get the bill for electricity, utilities, whatever it is, we all split it four ways and then we pay it," she said. "Groceries – I still have to work on that one." But Rowan is much more financially savvy than some of her friends.

"I wanted a car, but I'm kind of glad I don't have one here," she said. "You have to buy a parking permit for about $200."
—By CNBC's Kelley Holland. Follow her on Twitter

@KKelleyHolland.